Water regulator Ofwat says Thames has so far failed to justify £331m of its
initial £655m spending plans on the £4.2bn Thames Tideway Tunnel

Thames Water has only justified half of its initial spending plans for the London supersewer project, regulator Ofwat has warned, demanding the company provide more information to explain proposals for a further £331m outlay.

The company wants approval to spend £655m over the next five years, as part of the £4.2bn project to upgrade the capital’s sewers and prevent sewage discharge into the Thames.

But Ofwat said on Wednesday it was so far only convinced by £324m of the spending.

The regulator is mid-way through negotiations on utilities’ spending plans for 2015-2020, which will determine customers’ bills for the period.

It has now written to Thames and to two other water companies, United Utilities and Bristol Water, telling them it is yet to be convinced it should allow them to spend as much money as they are seeking over the next “price control” period.

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Ofwat said there were “very material differences” between the companies’ latest spending plans and its own “assessment of efficient wholesale costs”.

United Utilities had so far failed to justify £769m of its spending plans related to wastewater, including £35.4m on schemes to protect shellfish, while Bristol Water had failed to justify £203m spending on water.

The regulator, which will issue its draft determination on the plans at the end of the month, has given the companies advance warning that they will need to either substantially revise their plans or submit more information to justify them, ahead of a final deadline of October 3.

Thames is the only major company proposing real-terms bill increases over the five-year period. It wants to increase household bills by £8 above inflation each year to pay for the £4.2bn supersewer.

The majority of the work on the supersewer – about £2.8bn - will be carried out through a new separate “infrastructure provider” company, which is currently being procured to deliver the project and is due to be appointed in 2015.

But Thames expects to spend about £1.4bn of the bill directly, and had proposed spending £655m of that over the first five years.

Of the £331m of this that Ofwat contests, one major area of dispute relates to Thames seeking £110m in order to carry out extra work “should the appointment of the infrastructure provider be delayed until October 2015”.

Some of this would be expenditure that would otherwise be incurred by the new company, and therefore would not add to the total bill for the project.

Ofwat said it understood the need for such contingency costs but that Thames “did not commit to what activities it needed to carry out” or provide a robust cost estimate of the works.

A spokesman for Thames Water said it was “helpful that Ofwat have raised these questions with us at this stage of the ongoing price review process”. It said it agreed “with Ofwat’s statement that the majority of the gap identified should be resolvable with further information”.